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A test of the expectations hypothesis of the term structure of interest rates for Sri Lanka

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  • Arusha Cooray

Abstract

This paper tests the expectations hypothesis of the term structure of interest rates for Sri Lanka. The data support the hypothesis that forward and spot rates are cointegrated suggesting a stochastic trend in the structure of interest rates. However, the hypothesis that forward rates are unbiased predictors of future spot rates is rejected.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684032000148524
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 17 ()
Pages: 1819-1827

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Handle: RePEc:taf:applec:v:35:y:2003:i:17:p:1819-1827

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References

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  1. Gonzalez, Jorge & Spencer, Roger & Walz, Daniel, 1999. "The information in the Mexican term structure of interest rates: capital market implications," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 149-161, April.
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  3. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper 8907, Federal Reserve Bank of New York.
  4. Jones, David S. & Vance Roley, V., 1983. "Rational expectations and the expectations model of the term structure : A test using weekly data," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 453-465, September.
  5. Tease, Warren J, 1988. "The Expectations Theory of the Term Structure of Interest Rates in Australia," The Economic Record, The Economic Society of Australia, vol. 64(185), pages 120-27, June.
  6. Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, vol. 43(2), pages 339-56, June.
  7. Lin, Bing-Huei, 1999. "Fitting the term structure of interest rates for Taiwanese government bonds," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 331-352, November.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. N. Gregory Mankiw & Jeffrey A. Miron, 1986. "The Changing Behavior of the Term Structure of Interest Rates," NBER Working Papers 1669, National Bureau of Economic Research, Inc.
  10. Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
  11. John Y. Campbell & Robert J. Shiller, 1988. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
  12. Mishkin, F.S., 1988. "What Does The Term Structure Tell Us About Future Inflation?," Papers fb-_88-29, Columbia - Graduate School of Business.
  13. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  14. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  15. Frederic S. Mishkin, 1982. "Monetary Policy and Short-Term Interest Rates: An Efficient Markets-Rational Expectations Approach," NBER Working Papers 0693, National Bureau of Economic Research, Inc.
  16. Hicks, J. R., 1975. "Value and Capital: An Inquiry into some Fundamental Principles of Economic Theory," OUP Catalogue, Oxford University Press, edition 2, number 9780198282693.
  17. Hardouvelis, Gikas A, 1987. " Reserves Announcements and Interest Rates: Does Monetary Policy Matter?," Journal of Finance, American Finance Association, vol. 42(2), pages 407-22, June.
  18. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  19. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
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Citations

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Cited by:
  1. Osmani Teixeira de Carvalho Guillén & Benjamin M. Tabak?, 2007. "Characterizing The Brazilian Term Structure Of Interest Rates," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 108, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  2. SANTOS, Carlos & OLIVEIRA, Maria Alberta, 2007. "Modelling The German Yield Curve And Testing The Lucas Critique, 1975-2001," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1).
  3. Arielle Beyaert & Juan Jose Perez-Castejon, 2009. "Markov-switching models, rational expectations and the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 41(3), pages 399-412.
  4. McMillan, David G., 2009. "Forward interest rate premium and asymmetric adjustment: Evidence from 16 countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 258-273, April.

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